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"Lot's of arbitrage opportunities. " Probably with put options. https://www.zerohedge.com/news/2017-04-09/horseman-global-unveils-new-shorting-philosophy-usin

"Lot's of arbitrage opportunities. " Probably with put options. https://www.zerohedge.com/news/2017-04-09/horseman-global-unveils-new-shorting-philosophy-using-etf-flows-catalyst https://www.zerohedge.com/news/2017-04-09/horseman-global-un... ETFs were an outstanding idea but never meant to be used on such an excessive scale. If once stock falls and many of the ETFs have to re-balance their index to reflect this, this creates a feed back effect. And if Index ETFs and HFT are the last ones trading this stock, good luck with this. Everything works until it doesn't.

asdfasgasdgasdg 7y ago
Cap-weighted index funds do not have to rebalance when a stock falls (this is the most common type as I understand it). Consider a cap-weighted index where there are only two stocks, A and B. At time 0 the have an equal market cap of $1B each. The underlying mutual fund has $20M of AUM, so they hold $10M of A and $10M of B. State of the world ------------------ Market caps A=$1B B=$1B Fund holdings A=$10M B=$10M Now at time 1 some bad news about B is made public. B's price falls by 50%. Market caps A=$1B B=$0.5B Fund holdings A=$10M B=$5M As you can see, the market cap weighted target for B dropped from 50% to 33%. But the fund's holdings of B also dropped from 50% to 33%. No rebalancing is required because the asset price changed at the same time as the market cap weighted fraction changed. The only time a fund needs to rebalance is when a security is removed from or added to the underlying index. I don't know how that is handled, but I suspect it is predictable and priced in.
- thtthings 7y ago
  What happens when the ETF value goes down not because the value of the underlying stock goes down but because people are selling the ETF? Won't they need to rebalance then? The way it will happen is they will have to sell all the stocks in the ETF according to their percent allocation
  - asdfasgasdgasdg 7y ago
    Authorized participants [1] will buy the undervalued shares and redeem them for shares in the underlying fund for a profit. FWIW, there is no such thing as "rebalancing" an ETF. The underlying fund can rebalance, but the ETF is an exchange-traded representation of the underlying fund. There's nothing in it to rebalance. [1]: https://www.etf.com/etf-education-center/7540-what-is-the-etf-creationredemption-mechanism.html?nopaging=1 https://www.etf.com/etf-education-center/7540-what-is-the-et...
  - wbl 7y ago
    When people sell shares in the ETF they sell shares in the ETF. It is not a mutual fund redemption.
walshemj 7y ago
The other problem is forced buying of overvalued or dog stocks eg being forced to hold Enron and the UK banks to the bitter end.

asdfasgasdgasdg 7y ago

Cap-weighted index funds do not have to rebalance when a stock falls (this is the most common type as I understand it). Consider a cap-weighted index where there are only two stocks, A and B. At time 0 the have an equal market cap of $1B each. The underlying mutual fund has $20M of AUM, so they hold $10M of A and $10M of B. State of the world ------------------ Market caps A=$1B B=$1B Fund holdings A=$10M B=$10M Now at time 1 some bad news about B is made public. B's price falls by 50%. Market caps A=$1B B=$0.5B Fund holdings A=$10M B=$5M As you can see, the market cap weighted target for B dropped from 50% to 33%. But the fund's holdings of B also dropped from 50% to 33%. No rebalancing is required because the asset price changed at the same time as the market cap weighted fraction changed. The only time a fund needs to rebalance is when a security is removed from or added to the underlying index. I don't know how that is handled, but I suspect it is predictable and priced in.

thtthings 7y ago
What happens when the ETF value goes down not because the value of the underlying stock goes down but because people are selling the ETF? Won't they need to rebalance then? The way it will happen is they will have to sell all the stocks in the ETF according to their percent allocation
- asdfasgasdgasdg 7y ago
  Authorized participants [1] will buy the undervalued shares and redeem them for shares in the underlying fund for a profit. FWIW, there is no such thing as "rebalancing" an ETF. The underlying fund can rebalance, but the ETF is an exchange-traded representation of the underlying fund. There's nothing in it to rebalance. [1]: https://www.etf.com/etf-education-center/7540-what-is-the-etf-creationredemption-mechanism.html?nopaging=1 https://www.etf.com/etf-education-center/7540-what-is-the-et...
- wbl 7y ago
  When people sell shares in the ETF they sell shares in the ETF. It is not a mutual fund redemption.

walshemj 7y ago

The other problem is forced buying of overvalued or dog stocks eg being forced to hold Enron and the UK banks to the bitter end.